UPDATE 2-Nasdaq 3rd quarter profit down as trading volumes fall

John McCrank

* 3rd-quarter adj profit 62 cts/share vs Street view 60 cts

* Net revenue down 6 pct to $409 mln vs Street's $411.9 mln

* Shares end down 2.3 percent

Oct 24 (Reuters) - Nasdaq OMX Group Inc's profit fell nearly 20 percent in the third quarter due to a steep drop in trading volumes of U.S. and European equities, the exchange operator said on Wednesday.

U.S. and Nordic equity volumes declined over 30 percent from a year earlier on lower volatility and investor caution in the face of political and economic uncertainty, the company said.

Net income attributable to Nasdaq was $89 million, or 52 cents a share, down from $110 million, or 61 cents a share, a year earlier. Excluding one-time items, it earned 62 cents a share, 2 cents above analysts' average forecast, according to Thomson Reuters I/B/E/S.

Equity market volume is closely correlated with economic growth, Nasdaq's Chief Executive Robert Greifeld said on a call with analysts.

``So we're optimistic about that over the medium- to long-term,'' he said.

Net revenue fell 6 percent to $409 million. Analysts had expected $411.9 million.

Nasdaq has put a greater emphasis on building revenue in areas such as market data and technology over the years to reduce its reliance on trading fees. Transaction revenues are now less than 30 percent of its overall revenue pie.

``Clearly, the lower percentage of 'falling' transaction revenues gives NDAQ's earnings more stability than its publicly traded U.S. exchange peers, who all have a higher dependence on trading volumes and revenue,'' Richard Repetto, an analyst at Sandler O'Neill + Partners, said in a note to clients.

Nasdaq shares ended down 2.3 percent at $23.58.


Exchanges and trading firms have also seen an increased focus on market structure by regulators following high profile technical glitches that put the spotlight on electronic trading systems.

A glitch on Nasdaq's exchange on May 18 led to delays in order confirmations during Facebook Inc's market debut. Market makers say they lost hundreds of millions of dollars as a result.

Nasdaq proposed a $62 million payback plan for firms harmed in the IPO and a ruling on the matter by the U.S. Securities and Exchange Commission (SEC) could come as soon as the end of the month, but will likely require more time, Greifeld said.

``To the extent the SEC requires more time, then we would agree to that, so I'm not here to predict what they may do, but end of the year is a reasonable guess,'' he said.

Some market making firms such as UBS AG and Citigroup Inc want Nasdaq to reimburse all of the losses.

At stake in the SEC decision is the extent to which U.S. exchanges, which match hundreds of billions of dollars of securities transactions daily, can be liable for glitches.


In light of recent events, such as Knight Capital Group Inc losing over $400 million due to a software glitch that flooded the market with unintended trades, Nasdaq will be spending a lot of time developing things such as ``kill switches,'' Eric Noll, Nasdaq's head of transaction services, said on the analyst call.

The SEC held a roundtable earlier this month that looked at ways to prevent damages from electronic trading. The concept of kill switches - where exchanges could cut order flow from any given broker at any given time - was the center of discussion.

``There's been tremendous industry discussion with respect to kill switches. We think that's a good evolution of the market that we have to see,'' Greifeld said.

High frequency trading firms (HFTs) have also garnered a lot of recent attention, with critics arguing some HFT strategies such as flooding the markets with order quotes that are quickly canceled are unfair. HFTs account for more than 60 percent of equities trades in the United States and about 30 percent in the United Kingdom, according to a recent study.

Greifeld suggested there might be new rules coming from both exchanges and regulators that would require HFTs to take on market making obligations, providing liquidity to the market.

HFT represents around $50 million worth of annual revenue for Nasdaq, Greifeld said. That revenue includes collocation fees - when firms pay to place servers inside an exchange's data center to shave milliseconds off of the time it takes for trades to be executed.

``It's going to be our effort and others' to take out of this high frequency debate a positive outcome where these participants become market makers, become obligated to provide higher levels of support to the lower end of the marketplace. So we see this as opportunity,'' he said.

Greifeld defined HFT as trading done on a proprietary basis that utilizes low latency technology in a data center of a market center, with traders who tend not to hold overnight positions, have an average order life under one second and an order to trade ratio above 100. And they are not designated market makers with market maker obligations.


Revenue from cash equity trading, which makes up 11 percent of Nasdaq's overall revenue, fell 30 percent to $47 million.

Global market data revenue, which makes up 21 percent of overall revenue, rose 5 percent to $84 million.

Derivatives trading and clearing revenue, which accounts for 18 percent of total revenue, was down 14 percent at $72 million.

Operating expenses fell just under 1 percent to $239 million. Nasdaq lowered its 2012 operating expense guidance to a range of $922 million to $935 million from $935 million to $965 million.